Strong demand driving fuel prices higher - Dairy Herd Management

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Strong demand driving fuel prices higher

 

By Dairy Herd news source (3/10/2006)

 

Strong global demand rather than a shortage of supply stateside is the

driving factor behind the high costs of gasoline, says Matthew Roberts,

Ohio State University extension economist.

 

The popular notion that constrained refining capacity is the cause of

high fuel prices is misplaced.

 

"We can easily look at the futures market and get a good idea of the

money being made by refiners. What we have seen over the last five years

hasn't been a significant shift in refining margins. If we truly had a

shortage of refining capacity and it was having an effect on our energy

prices, then refineries would be making lots of money. We'd see the

difference between the cost of the input and the cost of the output

increasing," said Roberts. "Instead, with a few exceptions, we've seen

that refining margin holding steady or declining. Refining margins are

at their lowest point in five years, so there actually appears to be a

refining capacity surplus in the market. "

 

Roberts contends that global demand for energy driven by strong economic

growth is the fundamental issue driving the energy market.

 

"Part of the energy demand is coming from China, which is using the

energy not for driving cars, but for microgeneration of electricity.

Here in the states, Americans' consumption habits of fuel have not

changed dramatically in response to higher fuel prices. And so this

country's gasoline demands are increasing," said Roberts.

 

In addition, global economic growth is on track to be over 4 percent

this year. Strong economic growth translates into strong oil demand.

 

Add in the supply fears generated from such issues as instability in the

Middle East and Iran's nuclear production aspirations, and global oil

flow becomes tighter.

 

So what does this mean for American consumers? Right now, not much, but

things could change this summer.

 

"Until we get to $3 a gallon on gasoline, American consumers don't

really seem to care about the price," said Roberts. "But this summer

certain regions of the country may see $3 a gallon of gas or higher. The

issue will have less to do with whether or not there's enough gasoline,

but whether or not there is enough fuel of the right specification at

the right place at the right time. There are a lot of worries this

scenario might happen."

 

One scenario that might cause those higher prices is government

regulations that require dramatic reductions in sulfur content in

gasoline and diesel starting this summer.

 

"Right now, ultra-low sulfur fuels represent less than 1 percent of all

the fuel being produced. This number needs to rise to 70 percent or 80

percent by this summer," said Roberts. "Refineries will have to be taken

off-line to make the adjustments so they can meet those targets. When

you are not producing fuel and living off the inventories we have,

that's going to cause prices to rise."

 

Also, refineries across the United States are phasing out fuel additive

MTBE (methyl tertiary butyl either) and replacing it with ethanol.

Analysts speculate this phase-out, which California is expected to

complete this year, will stretch the country's gas supply.

 

Farmers or other small business owners who store fuel on-site should

take note, said Roberts.

 

"The take away point of this whole situation is that for those who have

fuel storage, I would be filling it to the max right now," said Roberts.

"It would probably be wise to fill fuel storage for use through June,

and if you have any additional capacity, to fill up all tanks at this

point."

 

U.S. consumers are already seeing a taste of what might come in a few

short months. According to the Department of Energy, average retail gas

prices have risen nearly 8 cents from the previous two weeks, and

Roberts said the prices are likely to continue to climb well into April.

 

"We are entering into the refinery maintenance season, where the units

are taken off-line to be repaired, modified, or upgraded. Some

refineries went off-line March 2," said Roberts. "More refineries will

continue to go off-line, and as that happens, we'll see the price of gas

continue to increase."

 

/Ohio/ /State University/